Japan ups GDP growth to 3.8 percent in April-June

TOKYO (AP) — Japan's economy expanded faster in April-June than earlier reported, according to a revised estimate showing a real annualized growth rate of 3.8 percent, thanks to higher spending on private and public investment.

The first preliminary estimate had put the rate of growth for the world's third-largest economy at 2.6 percent.

The Cabinet Office also said Monday that the economy expanded 0.9 percent from the previous quarter, compared with an earlier estimate of a 0.6 percent increase.

The stronger data make it more likely the government will go ahead with a planned sales tax increase that some economists worry could slow the recovery, but which is needed to help curb the country's massive national debt.

"But the ongoing large reliance on consumer and government spending suggests that some accompanying fiscal stimulus will be needed to prevent growth from slowing too sharply," said a commentary from Capital Economics.

Corporate tax cuts might also help, it suggested. A number of Japanese senior officials have urged that Tokyo reduce corporate taxes, which at over 35 percent are among the highest among leading industrial nations. However, fewer than a third of all companies actually pay such taxes, which means such measures may do little to encourage investment.

The news, coupled with Tokyo's selection over the weekend to host the 2020 Summer Olympics, prompted a rally on the Tokyo Stock Exchange, where the benchmark Nikkei 22 index gained 2.5 percent Monday.

Construction and construction materials companies, real estate and tourism are among sectors expected to benefit directly from Tokyo's role as host. But the government estimates that the overall positive impact could top 4 trillion yen ($40 billion).

The government already is spending heavily on construction as part of its stimulus program, with significant sums allocated to public works left unspent. Economists say contractors are already stretched by reconstruction of areas in northeastern Japan that were devastated by the March 2011 earthquake and tsunami disaster.

Apart from the improvement to bottom lines, the games are a morale booster for a country unnerved by more than 20 years of economic stagnation following the bursting of its 1980s financial bubble. As the population ages and shrinks, companies have even less incentive to make the sorts of substantial investments needed to spur sustained growth.

Monday's GDP revision actually showed lower consumer and residential spending, a weak point given the large role consumption plays in Japan's economy.

Several other surveys also showed worrying signs, with consumer confidence sagging in August as income growth, employment and livelihood measures dipped. The Cabinet Office's "Economy Watchers" survey also unexpectedly weakened in August to its lowest level since January.

"On balance, today's data indicate that the economy is entering a phase of slower growth," Capital Markets economists Marcel Thieliant and Julian Jessop said in a separate commentary.

The revised GDP data did show a 3 percent increase in public investment, compared to the earlier estimate of a 1.8 percent increase. It also showed a slight increase in private, non-residential investment. Data on exports and imports remained unchanged.

Prime Minister Shinzo Abe has made restoring growth a key priority, setting a 2 percent inflation target he says is needed to break Japan from deflation and get the economy back on track after more than 20 years of stagnation.

The revision in private investment is an encouraging sign, but so far Japanese companies have not demonstrated a renewed confidence in the country's economic potential by investing heavily in the home market or raising wages.